My wife and I were chatting the other night about our investments and she asked "how do we know we aren't investing with the next Madoff?"... which I thought was a great question. My initial response was that we don't have all of our eggs in one basket so that alone makes a big difference. I've subsequently checked to see who the auditors are for each of our fund investments -- the majority of whom are the big four so that helps too. But with that said, what other due diligence checks can we do to minimize risk here?
Comments
Mutual funds almost always use 3rd party custodians for holding assets under your name and as opposed to (so-called) money managers like Madoff that take custody of the money. This itself largely prevents fraud.
http://www.ehow.com/facts_5844357_mutual-fund-custodian_.html
http://en.wikipedia.org/wiki/Custodian_bank
"The vast majority of funds use a third party custodian as required by SEC regulation to avoid complex rules and requirements about self-custody."
Here is a good summary regarding the operation of mutual funds:
http://www.icifactbook.org/fb_appa.html